This article first appeared in The Edge Financial Daily, on February 11, 2016.

KUALA LUMPUR: Scomi Group Bhd may be attracting attention of late as the tenure of its three-year RM110 million convertible bonds issued to IJM Corp Bhd expired on Monday. Will IJM Corp exit the oil & gas (O&G) outfit by redeeming debt papers and selling off the 7.66% stake that it owns in Scomi?

With the sharp fall in Scomi’s share price since 2014, it is apparent that IJM Corp is unlikely to convert the bonds into equity. The conversion price is pegged at 36.5 sen per share, which is more than double last Friday’s closing of 15 sen.

Under the bond agreement, IJM Corp could convert up to 301.37 million Scomi shares to become a 22.66% shareholder of Scomi. The conversion will cost IJM Corp RM110 million, and the investment will be slashed significantly when the shares enter the market.

When Scomi announced its intention to issue share placement and convertible bonds to IJM Corp, its stock was worth 35 sen.

The redemption price on the third anniversary is RM1.33 for every RM1 nominal value of the debt paper, plus 10% for each full year the bonds remain outstanding, or RM146.3 million.

The full payment for the debt papers is more than half of the cash in Scomi’s hands as at Sept 30, 2015, totalling RM236.03 million. Nonetheless, it would seem that it is in a comfortable position to pay its bondholders.

As at the end of the second quarter of financial year 2016 (2QFY16), Scomi had total debts of RM875.83 million, or 1.19 times its shareholders’ funds worth RM737.12 million. Most of the debts, at RM695.72 million, were short-term borrowings.

IJM Corp’s investment in Scomi — a move that the construction giant made to diversify into the then booming O&G sector — does not seem to be fruitful.

In the release of its results for the quarter ended Sept 30, Scomi conceded that it was cautious about its performance in FY16 ending March 31. It said its oilfield services and transport segments continued to bid for jobs, but its marine services needed to be mindful of costs as demand for transporting coal and oil has subsided.

The O&G sector has been the worst afflicted in the current landscape, owing to the supply glut that has depressed crude oil prices. Scomi said in the notes accompanying its financial statements  for the three months ended Sept 30, 2015 (2QFY16) that there were less drilling activities in the quarter compared to a year earlier.

For 2QFY16, Scomi posted lower net profit of RM14.74 million against RM17.25 million in the previous corresponding period. Revenue was lower at RM717.65 million versus RM877.3 million a year ago.

Its marine services also posted a loss of RM5 million in 2QFY16 because of lower tonnage carried and fewer shipments for all its contracts. Correspondingly, the segment’s revenue fell 36.7% year-on-year to RM43.6 million.

Scomi’s transport solution business, which turned around in FY15, suffered a 41.4% drop in revenue to RM43.3 million in 2QFY16 — although it was still profitable. It said the top-line’s decline happened because of lower value of work done on monorail projects in Malaysia, India and Brazil.